It’s the great Aussie debate – Do I pay down my mortgage faster or make more Super contributions? Both are sensible options which can help put you in good stead for a comfortable retirement. But which is more financially beneficial and why? We generally see people rushing to pay down their mortgage and then find they try shovel money into Super later in life. Albeit, the argument for paying more off your mortgage has become stronger in recent times with increasing interest rates, however, you still might be better off financially in the long‑term if you contribute more to your Super. The following will discuss the differences between both options.
Firstly, let’s look at the difference between personal marginal tax rates (MTR) and superannuation tax rates. Marginal tax rates vary from 0% to 45% (excluding Medicare); while pre-tax concessional contributions to super, such as your employer’s superannuation guarantee contributions (SGC) and salary sacrificing are generally taxed at a rate of 15%. Investment earnings inside super also attract 15% tax. Conversely, the savings you make on your mortgage do not attract any additional tax.
Secondly, the other variable to consider is the return on your money. As at 30 October 2023, the average mortgage rate for a standard variable home loan was 6.32% (CANSTAR, 2023). On the other hand, the average return on a growth investment option in Super was 9.2% net of tax for the 22/23 financial year (Chant West, 2023).
When considering returns, we need to consider potential risks involved. By paying down your mortgage, you’re guaranteed to receive a saving equal to the rate on your mortgage. However, when investing in Super, depending on how your money is invested your returns can fluctuate up and down and returns are never guaranteed.
Example
Let’s look at two basic hypothetical scenarios based on someone who earns $80,000 per annum (MTR 34.5% inc medicare), has a mortgage with an interest rate of 5.5% and a super fund which provided a return of 7%. This person has received a $10,000 bonus but isn’t sure whether they should direct it to their mortgage or Super. Which option would provide the best financial outcome after one year?
| Extra mortgage repayments | Salary Sacrifice into super | |
| Gross amount | $10,000 | $10,000 |
| Net amount after tax | $6,550 ($10,000 – 34.5%) | $8,500 (10,000 – 15%) |
| Income tax saved | Nil | $1,950 ($8,500 – $6,550) |
| Potential savings/ earnings | $360 ($6,550 x 5.5%) | $595 ($8,500 x 7%) |
| Tax on savings/ earnings | Nil | $89 ($595 x 15%) |
| Net savings/ earnings | $360 | $2,456 ($1,950 + $595 – $89) |
*All figures rounded
Using this example, investing the additional $10,000 into their Super instead of the mortgage provides a better financial outcome.
The sweet spot for making more pre-tax contributions to Super instead of your mortgage would be for those who earn between $45,000 and $250,000. If your income is less than $45,000 per-annum it might be difficult to find surplus cash to contribute and the tax benefits aren’t as great. Conversely, if your income is around $250,000 per annum your annual $27,500 concession contribution cap will start to fill up.
While investing more into Super might be a good option, it is highly important that you understand how your super is invested prior to making additional contributions. Further consideration must be given to your situation including age, risk profile and liquidity needs. Talk to a Financial Adviser who can assist you with this.
Any general advice in the publication has been prepared without taking into account your objectives, financial situation or needs. Before you act on any general advice in this publication, you should consider whether it is appropriate to your individual circumstances. Please seek personal advice prior to acting on this information.
Damian Gibson, Partner & Financial Adviser, Elevate Wealth
